To calculate ROI, subtract what you invested from what you got back, divide the result by what you invested, and multiply by 100. Put $10,000 in, get $15,000 out, and your ROI is ($15,000 − $10,000) ÷ $10,000 = 50%. That is the whole formula. The harder part is deciding what counts as “invested” and “returned”, and accounting for time.
This guide walks through how to calculate ROI properly, then shows how to turn it into an annual rate so you can compare a three-year investment with a one-year one. You can check every number here with our ROI calculator, which also handles regular contributions and the annualized figure.
The ROI formula
Return on investment is a ratio: the gain divided by the cost.
ROI = (amount returned − amount invested) ÷ amount invested × 100“Amount returned” is everything you got back: the sale price, plus any income received along the way (dividends, rent, interest), minus any costs of selling. “Amount invested” is everything you put in: the purchase price, plus fees, commissions, repairs and any further contributions.
A positive ROI means you made money; a negative one means you lost some. An ROI of −20% means you got back 80 cents for every dollar you put in.
A quick example
You buy 100 shares at $40 each and pay a $10 commission, so your cost is $4,010. Over two years you receive $160 in dividends. You sell at $47 and pay another $10. The amount returned is $4,700 − $10 + $160 = $4,850.
ROI = ($4,850 − $4,010) ÷ $4,010 = $840 ÷ $4,010 = 20.95%.
Leave out the commissions and dividends and you would get 17.5%, which is a different answer to the same question. Being consistent about what goes in each bucket matters more than the arithmetic.
Why basic ROI ignores time
Plain ROI has a blind spot: it does not care how long your money was tied up. A 50% return over three years and a 50% return over ten years show the same ROI, yet one is clearly better.
That is why you also need the annualized ROI, the steady yearly rate that would grow your money from the starting value to the ending value over the same period. The table shows how much a 50% total return shrinks once you spread it over more years.
| Total ROI | Holding period | Annualized ROI |
|---|---|---|
| 50% | 1 year | 50.00% |
| 50% | 2 years | 22.47% |
| 50% | 3 years | 14.47% |
| 50% | 5 years | 8.45% |
| 50% | 10 years | 4.14% |
Ten years for a 50% gain works out to about 4.1% a year, roughly what a high-yield savings account or a Treasury bond might have paid with far less risk. The headline ROI made it look much better than that.
How to calculate annualized ROI and CAGR
Annualized ROI uses the same idea as compound growth. Take the ratio of what you ended with to what you started with, raise it to the power of one divided by the number of years, and subtract 1.
Annualized ROI = (amount returned ÷ amount invested)^(1 ÷ years) − 1For the $10,000 that became $15,000 over three years: 1.5^(1/3) − 1 = 1.1447 − 1 = 14.47% a year. You can confirm it with the annualized return calculator.
When people talk about the growth of a business, a fund or a stock price, they usually call this number the compound annual growth rate, or CAGR. The math is identical. If revenue grew from $10,000 to $18,000 over five years, the CAGR calculator gives 12.47% a year. CAGR assumes the growth was smooth, so it hides bumpy years, but it is the fairest single number for comparing periods of different length. If you want the intuition behind why returns stack this way, our guide on how compound interest works covers it.
When money goes in at different times
Annualized ROI assumes one deposit at the start and one withdrawal at the end. If you added money every month or took income out along the way, the timing of each cash flow changes the true rate. In that case use the internal rate of return, which our IRR calculator works out from a list of dated cash flows. For a simple buy-and-sell, IRR and annualized ROI give the same answer.
Worked example: ROI on a rental property
Property is where ROI gets messy, because there are so many costs and because most buyers borrow. Here is one property analyzed two ways.
The deal. You buy a house for $250,000, pay $10,000 in closing costs and spend $15,000 on renovation. After rent, vacancies, taxes, insurance and maintenance, the property earns $15,000 a year in net operating income. That is a 6% cap rate on the purchase price, which you can check with the cap rate calculator. After five years you sell for $340,000 and pay 6% ($20,400) in selling costs.
Paying all cash
- Amount invested: $250,000 + $10,000 + $15,000 = $275,000
- Amount returned: $340,000 − $20,400 + (5 × $15,000) = $394,600
- Gain: $394,600 − $275,000 = $119,600
- ROI: $119,600 ÷ $275,000 = 43.49%
- Annualized ROI: (394,600 ÷ 275,000)^(1/5) − 1 = 7.49% a year
Using a mortgage
Now suppose you put 20% down ($50,000) and borrow $200,000 at 6.5% for 30 years. Your cash in is $50,000 + $10,000 + $15,000 = $75,000. The loan payment is $1,264.14 a month, or $15,169.63 a year, which swallows all of the $15,000 income and leaves −$169.63 a year. After five years the loan balance is $187,221.95.
- Sale proceeds after costs and loan payoff: $340,000 − $20,400 − $187,221.95 = $132,378.05
- Five years of cash flow: 5 × −$169.63 = −$848.16
- Amount returned: $132,378.05 − $848.16 = $131,529.89
- Gain: $131,529.89 − $75,000 = $56,529.89
- ROI: 75.37%, or 11.89% a year annualized
Leverage lifted the ROI from 43% to 75%, but notice where the return came from: almost entirely the sale price. The yearly cash return on your $75,000 was slightly negative, which is what the cash on cash return calculator would show. If prices had stayed flat, the leveraged buyer would have lost money on the selling costs while the all-cash buyer still collected $75,000 of income. Higher ROI came with higher risk. For a fuller model with vacancy, expenses and appreciation, try the rental property calculator.
Marketing ROI and how it differs from ROAS
Marketers often report ROAS, return on ad spend, and call it ROI. They are not the same thing.
- ROAS = revenue from ads ÷ ad spend. It uses revenue, not profit.
- Marketing ROI = (gross profit from ad sales − ad spend) ÷ ad spend. It uses profit.
Say you spend $5,000 on ads and they bring in $22,000 of sales. ROAS is 4.4, often written 4.4:1 or 440%. Sounds great. But if your gross margin before ad costs is 30%, those sales produced $6,600 of gross profit. Marketing ROI = ($6,600 − $5,000) ÷ $5,000 = 32%.
At a 30% margin, your break-even ROAS is 1 ÷ 0.30 = 3.33. Any campaign below that loses money even though it “returns” more than it costs in revenue. A campaign that spends $2,000 to bring in $5,000 has a ROAS of 2.5 and still loses $500. The ROAS calculator shows ROAS, profit-based ROI and the break-even point side by side. If margins are new territory for you, see profit margin vs markup.
ROI vs ROAS vs ROE and other return ratios
Several metrics share the “return on” name. They answer different questions, and mixing them up is a common reason two people quote different numbers for the same project.
| Metric | Formula | Best used for |
|---|---|---|
| ROI | (Return − cost) ÷ cost | A single investment or project |
| Annualized ROI / CAGR | (End ÷ start)^(1/years) − 1 | Comparing investments held for different lengths of time |
| ROAS | Ad revenue ÷ ad spend | Quick read on ad campaigns (revenue-based) |
| ROE | Net income ÷ shareholders’ equity | How well a company uses owners’ money |
| Cash on cash | Annual cash flow ÷ cash invested | Yearly income yield on a leveraged property |
| IRR | Rate where NPV of all cash flows = 0 | Investments with many cash flows over time |
Return on equity is a company-level ratio. A business that earned $12 million on average equity of $80 million has an ROE of 15%, which you can reproduce with the ROE calculator. It tells you about management performance, not about the return you personally earned on the stock, which depends on what you paid for the shares.
What ROI ignores
ROI is a useful first filter, but it leaves out several things you should look at before committing money.
Risk
Two investments can show the same ROI with very different chances of losing money. The leveraged rental above is a good example. A guaranteed 5% is not the same as an expected 5% with a real chance of −30%.
Inflation
A 14.47% annual return with 3% inflation is a real return of 1.1447 ÷ 1.03 − 1 = 11.14%. The real rate of return calculator makes that adjustment. The U.S. Bureau of Labor Statistics publishes the Consumer Price Index you would use for the inflation figure.
Taxes and your time
Capital gains, rental income and dividends are taxed differently, and holding period can change the rate. A side business with a 40% ROI that takes 15 hours a week may pay you less per hour than your day job. Put a value on your time before you call something a winner.
Opportunity cost
The money could have been somewhere else. Compare every ROI against a simple alternative, such as a broad index fund or a savings account, over the same period. The SEC’s Investor.gov site has free tools and plain-language explanations of risk and return that are worth reading before you invest.
This guide is general information to help you do the arithmetic, not personal financial advice.
Common mistakes when calculating ROI
- Leaving out costs. Fees, closing costs, repairs, software subscriptions and your own labor all belong in “amount invested”.
- Comparing ROIs over different periods. Always annualize before comparing a 2-year project with a 6-year one.
- Treating ROAS as ROI. Revenue is not profit. Check your margin first.
- Using the wrong base. ROI divides by the cost, not by the final value. A gain of $5,000 on $10,000 is 50%, not 33%.
- Mixing up percentage change and percentage points. Going from 8% ROI to 10% ROI is 2 percentage points, or a 25% improvement. Our percentage guide covers the difference.
- Ignoring the timing of cash. Money received in year one is worth more than the same money in year five. Use IRR when cash flows are spread out.
Frequently asked questions
What is a good ROI?
It depends on risk and time. Broad U.S. stock indexes have historically averaged roughly 10% a year before inflation over long periods, so many investors treat that as a benchmark for risky assets. For a business project, a good ROI is one that beats your cost of capital with room to spare.
How do I calculate ROI as a percentage?
Divide the net gain by the cost and multiply by 100. A $300 gain on a $1,200 investment is 300 ÷ 1,200 × 100 = 25%.
Can ROI be negative?
Yes. If you get back less than you put in, ROI is negative. Invest $2,000, get back $1,500, and ROI is −25%. The lowest possible ROI on an unleveraged investment is −100%, meaning you lost everything.
What is the difference between ROI and annualized ROI?
ROI is the total return over the whole holding period. Annualized ROI converts it into an equivalent yearly rate so you can compare investments held for different lengths of time.
Is ROI the same as profit margin?
No. ROI compares profit to the amount invested, while profit margin compares profit to revenue. A shop can have a thin 5% net margin and still earn a high ROI if it turns its inventory over many times a year.
How do I calculate ROI with monthly contributions?
Add up all contributions as the amount invested and compare with the ending value for simple ROI. For an accurate annual rate, use IRR, because early deposits were invested longer than late ones.
Start with the basic formula, make sure every cost and every dollar of income is in the right bucket, then annualize so you are comparing like with like. Do that and ROI becomes a reliable way to rank your options. Plug your own numbers into the calculators linked above, try a pessimistic version alongside the optimistic one, and see whether the deal still looks good.